Section A
QUESTION 1
a) FORWARDS:
iWork will enter into a forward contract to mete out USD one C billion for INR 5500 million(fixed aim of USD 1 = INR 55) later 12 months.
* If INR appreciates (to say 1 USD = 50 INR), the rate fluctuation is mitigated as iWork still receives 1 USD = 55 INR
- On the downside if INR depreciates (to say 1 USD = 60 INR), iWork stands to lapse out
5 INR per USD.
b) OPTIONS:
iWork can take a prospicient position in a Put option (100 million USD at 50 INR for 1 USD after 12 months)
or
iWork can take a want position in a Call Option (5000 million INR at 1 INR for 0.02 USD after 12 months)
1USD = 40 INR
PAY support
wont Sell .
Sell at 50 INR
1USD = 60 INR
Fig 1.1 - Long PUT 100 million USD at 50 INR for 1 USD after 12 months
1INR =0.03 USD
PAY PREMIUM
Wont Buy.
Buy at 0.02 INR
1INR = 0.01 USD
Fig 1.2 - Long CALL 5000 million INR at 1 INR for 0.02 USD after 12 months
QUESTION 2
According to Interest Rate Parity
in advance rateSpot rate=1+interest rateforeign1+interest ratedomestic
Substituting the set in the formula,
F/50 = (1+0.08)/ (1+.03)
F= (1.08*50)/ (1.03)
F =52.
4271
Intuitively, if the social club holds 100 USD for a year and invests it in US, it would receive 103 USD after a year. On the other hand if the same is converted into INR at todays spot rate we would hand 5000 INR. This when invested in India would give us around 5400 INR.
So effectively the forward rate should be more wherein holding 100 USD for a year should yield at least 5400 INR. thence it should be greater than 50.
QUESTION 3
Farmer wants to sell 1000 MT
Unit of Delivery at NCDEX is 10 MT
Therefore, the bend of future contracts the Farmer can trade = 1000/10 = 100
The farmer can sell 100 stalk future contracts after 3 months at a expense assumed as 100 INR per contract.
Pros:
(i) The farmer has hedged himself against a price decrease
(ii) Doesnt tie up much majuscule He...If you want to get a full essay, order it on our website: Ordercustompaper.com
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